TODAY’S STUDY: Investor Concerns About Solar Stocks Emerge
Solar Industry Update: Concerns over 2H Fundamentals Emerging
Vishal Shah, 7 June 2016 (Deutsche Bank Securities)
In this note, we provide our thoughts and most commonly asked questions from investors following meetings with company managements and over 50 investors over the past few weeks. Our general take is that solar sector has still not completely emerged from the shadows of SUNE bankruptcy and balance sheet quality remains the biggest source of investor concern in the solar sector. Complicating the investment process is the complexity of solar business models and difficulty in modeling a path for sustainable cash flow generation. Against this backdrop, we prefer FSLR, SPWR and VSLR.
Concerns over 2H Fundamentals Emerging
We expect fundamentals to remain challenging in 2H16 as demand from China market could likely decline from 2H. With the US market unlikely to see the ITC rush and no other major market expected to pick-up the slack from China slowdown, investors are rightly concerned about the risk of oversupply from 2H16. Moreover, a significant amount of new supply is expected to come online in 2017 raising concerns over potential pricing/margin pressure for module manufacturers.
Resi Leasing Sector Investor Sentiment Remains the Weakest
Financing still remains the biggest question - for resi solar leasing companies, investors are generally concerned about the net metering policy changes in a few states such as Arizona, Nevada and implications for policy decisions in other states. Additionally, investors are rightly concerned about the availability of financing required to execute growth plans. Investor concerns are also fueled by the weaker than expected fundamentals (bookings and outlook) reported by most resi solar companies. We believe a combination of improving bookings momentum and execution on the financing front would be required for investor sentiment to improve. In the medium term, we also believe net metering policy overhang would need to be resolved for resi solar stocks to see meaningful share price appreciation. Most of these stocks are currently trading at or below the value of operating assets and investors are not giving any credit for the development business. VSLR remains our top pick within the resi leasing coverage universe.
Traditional Developers/Manufacturers Also Remain In Penalty Box
For solar developers/installers such as FSLR, SPWR, 2017 earnings/EBITDA outlook remains the biggest focus for investors. Concerns about rising Chinese competition and impact on module segment margins along with lack of visibility/profitability within the systems segment remains the primary investor concern. We like both FSLR and SPWR for different reasons. In the case of FSLR we believe concerns about 2017 earnings cliff are overblown. While we expect 2017 earnings to decline, the magnitude of decline would be less than feared primarily due to upside from systems segment as well as improving margins from series 5/6 production ramp. For SPWR, we believe the 2017 EBITDA would still be similar to 2016 levels due to 600MW of capacity expansion as well as more diversified business model mix. Pick-up in business momentum, which could be driven by bookings outlook would be an important catalyst for both shares, in our view.
Chinese Solar, Inverters Unlikely to Gain Near Term Traction, Remain Selective with Yieldcos
Chinese companies remain in a tough spot - investors are concerned about peaking margins, rising receivables and subsidy payment delays for domestic project developers. Stocks are not discounting much value for projects that these companies are holding on their balance sheet. Until and unless the outlook for China market improves - both from subsidy payment and installation volume standpoints, we do not see any meaningful catalyst for Chinese solar stocks. Inverter companies are similarly impacted by concerns about pricing pressure from Enphase as well as Chinese string inverter companies. We believe margin pressure in the inverter segment is likely to increase, however upside from the storage segment is not fully priced into these shares and prefer SEDG within this category. Finally, the yieldcos are challenged by weak capital markets environment and limited opportunity for near term drop downs which in turn is impacting medium term growth outlook. We do not expect CAFD to tap the capital markets in order to achieve 2017 dividend growth and expect shares to gradually grind higher as the company executes on dividend targets.
Buy-Side Views/Our Take